Category: ETF

Systematic Investment Plans or SIPs are really popular with Indian investors, and provide a way to invest regularly in mutual funds.

In the past there have been some discussion about how someone can set up a SIP with ETFs, and a lot of people have shown interest in setting up a SIP in ETFs or more specifically in gold ETFs.

I had a post on the topic with several roundabout ways of doing this, and before I tell you about the new way I discovered last week, let me recap them from my earlier post for you:

1. Kotak’s Auto Invest: Kotak has a plan called “AutoInvest” that in an online trading account based on systematic investment planning  in Gold ETFs, equities and mutual funds.

2. Set up reminders with your offline broker: If you trade using an offline broker – you can tell them to remind you by giving you a call at a certain day of the month, and remind you to place the trade.

3. Set up reminders in Outlook or Gmail: You can set up reminders using Outlook, Gmail or any other tool that reminds you to invest at a certain day of the month.

4. Buy a fund of funds that owns ETFs: As stated in the comment in yesterday’s post – you can set up an SIP for a fund of funds that invests in a particular ETF you are interested in – and that gives you an indirect way of getting into a SIP for an ETF.

5. Value Averaging Investment Plan (VIP) from Benchmark funds: This is an idea given by another commenter on the earlier post. This product from Benchmark is akin to set up an ETF – I am not sure how effective this is because I haven’t used it myself or done any great deal of research on it, but it does give another option to investors.

Now, you can add ICICI Direct to this list. Last week I saw that they have a new option called “Equity SIP” that lets you set up a systematic investment plan in a list of given stocks. These stocks include some ETFs also like the Benchmark Gold ETF or Benchmark S&P CNX 500 Fund.

Investors have been asking for this option since a long time, and it is great that they have one more way of setting up SIPs in ETFs. If you know of more ways than are listed here, then please do leave a comment, and I will update my post to include those options as well.

I wrote about the past two year returns on gold ETFs a few days ago, and got a comment on that inquiring about the expense ratio of the two new gold ETFs that are going to be launched shortly.

The first one is HDFC’s gold ETF, which is expected to have recurring expenses of 2.50% of weekly net average assets per its Scheme Information Document (SID).

The second gold ETF that is about to be launched is ICICI Prudential’s Gold ETF, which is also expected to have recurring expenses of 2.50% of its weekly average net assets per its SID that I found on the SEBI website.

If you look at my post on the best gold ETFs, or the list of all gold ETFs in the Indian market, these expenses compare to most of the funds, but are not among the lowest.

I read that HDFC is coming out with a new gold ETF, so I thought I’d check out how the existing ones are doing, and see what is the difference in returns between the gold ETFs that are already present in the market.

I went to the NSE website, and looked up the closing prices for all 7 existing gold ETFs for the past couple of years.

Here is how they have moved over the past two years.

As you would have probably expected, the prices move quite close together, and you can hardly notice any difference between the ETFs.

Next up, I did a chart of the absolute returns of the gold funds that have been in existence for the entire two year period.

Here is how that looks.

GOLDBEES does the best (and it does quite well in volumes also, as I mentioned in my best gold ETF post), and that is due to the fact that its expenses are lower than the competitors. More competition is always good for the customer, but unless someone comes up with an ETF with expenses lower than GOLDBEES, I can’t imagine them to be the best on this chart.

Someone from Motilal Oswal AMC left a comment on my earlier post, in which I complained about insufficient information in the prospectus about the underlying index of the new ETF that Motilal is going to launch.

I think the comment is worth the attention of a full post because it tells me that I was looking at an older draft, and there is in fact a Scheme Information Document (SID) that has more details on the index calculation, and the fee structure is lower as well.

Here is the comment:

Hi,

We think you are referring to our old prospectus.

We would like to mention that the MOSt 50 Basket would be calculated based on certain parameters and the same is mentioned on Page 11 of the Scheme Information Document (SID). You could read the revised SID at: http://www.mostshares.com/Pages/downloads.aspx

Further, regarding the expense structure, pls refer page 20 of the SID where we have capped the expense structure slab wise:

For first Rs. 1,000 crores – 1.00% p.a.

For next Rs. 2,000 crores – 0.75% p.a.

Over Rs. 3,000 crores – 0.50% p.a.

Thus, the SID contains all the details regarding the MOSt 50 Basket and about the Scheme.

Hope this information is helpful to you.

Regards,
Motilal Oswal AMC

Since the comment addresses the fee structure well, let me get to the underlying index and what I could gleam from the SID.

The constituents of the MOSt 50 Basket will be Nifty stocks, and a weight will be assigned to each stock based on certain fundamental factors and prevailing price.

The basket is classified into four categories:

Name	Number of Constituents	Percentage Allocation
Highest Capital Allocation	2 – 5	6% to 8% for each member of this category
Second highest capital allocation	3 – 7	4% to 6% for each member of this category
Third highest capital allocation	9 – 15	2.5% to 4% for each member of this category
Lowest Capital Allocation	Remaining constituents	Unallocated Capital

So, there will be a few companies that will be more dominant than others based on their higher ranking according to this methodology.

Here are the factors that are used to decide the weights of the individual stocks:

1. Shareholder funds: Money raised by shareholders plus retained earnings till date.

2. Return on Equity: ROE is calculated as: Profit after tax / Average common stakeholder equity. ROE measures how well the shareholder’s equity is performing.

3. Plow Back Ratio: This is calculated as: Retained Earnings / Profit After Tax, and shows you how much earnings has been kept back with the company for its future use.

4. Stock Price: The closing price of the stock on the day of rebalancing is considered.

This index is also going to be a Total Return Capture index, which means that the index will not only consider price movements but also take into account the dividend paid out by the companies and their impact if it were re-invested.

I must say that theoretically this sounds a lot more interesting than what I found it at the first go reading the other document. Whether this works in practice will only be seen when the fund has been on the market for a few years.

And great job by Motilal Oswal for responding so quickly and pointing me to the right data source.

Source:

Documents of Motilal Oswal MOSt M50 ETF

Update: Motilal Oswal left a comment on this post pointing to more recent documentation about the ETF, which contains more information about the underlying index. Here is the updated post with that information.

By now at least a few of you must have heard about this new ETF that is based on some sort of a fundamentally enhanced Index based on the S&P CNX Nifty Index.

I read about it yesterday, and then went through the prospectus to figure out what a “fundamentally enhanced index” means. But I didn’t find any answer there, and feel that the fund has done a very bad job of explaining how its index will behave.

In fact just reading through their description, it is not possible to figure out how the index will be constituted, how has it behaved in the past, and how exactly is it fundamentally enhanced?

Here is what I did find about the index:

K. ABOUT MOSt 50 Index
1. Objective
MOSt 50 Index is a fundamentally enhanced index based on S&P CNX Nifty Index
(Nifty).
MOSt 50 Index is designed such that it has the following characteristics:
1.1. Weights are assigned to all 50 constituents of Nifty.
1.2. Weights assigned to constituents are based on third party data and explicitly
defined rules.
1.3. Weights assigned to constituents are dependent on their fundamental performance
and their prices with higher weights being assigned to constituents which have
demonstrated superior financial performance and have reasonable valuation.
1.4. While designing MOSt 50 Index, care has been taken by AMC to ensure that:

1.4.1. Index beta (β), a measure of the correlation of the index returns with
market returns, is close to 1. Market Returns are defined as returns from an
investment made in Nifty.
1.4.2. Index Jensen’s alpha (α), a measure of returns in excess of market returns,
should be reasonably high.
1.4.3. Index’s Sharpe ratio, a measure of returns provided for the risk taken,
should be high.
1.4.4. Index turnover should be reasonable.

Reading through the description tells you that all 50 Nifty companies will be there in the index, but not in the same weights as they are present in the Nifty. There are some explicitly defined rules that will decide what the weights are, but those rules are not present in the prospectus.

The fund is expected to incur 1.50% of its assets as expenses, and if you compare it to Nifty Index Mutual Funds and ETFs, you can get them at the same or lower expenses. In fact, the Kotak Nifty ETF has got expenses of just 0.5%.

I think SEBI should ask these guys to explain how the underlying index will work, so that people get an idea on how the constituents are selected, and how it would change with time.

Today, Mr Credit Card from www.askmrcreditcard.com is going to drift away from his usual credit card rant. While he normally writes about airline credit cards or secured credit cards, today he is going to contribute a post about the flaws of market capitalization index.

Manshu is always talking and zooming in on the latest ETF news here. Today, I would like to chime in by talking about the flaws common in most ETFs in the market.

Market Capitalization Weighted – Since the beginning of modern portfolio theory that started back in the 1950s and 60s, one of the main premise was the the “markets were efficient”. By market, the academic meant a market weight capitalization index. In theory, a market weight capitalization index was easy to construct since the only variable was market cap. In fact, till this day, this has become the most common way indexes are calculated.

Having said that, there are flaws in this methodology. The main flaw is that as market rises, the index tends to get more expensive. That is because to maintain its market weight, large cap stocks are bought more, hence driving up prices and valuation. But the opposite also happens when the market tanks. As market cap declines, more selling begets more selling.

The phenomenon is most pronounced when a new stock is included in the index and and a stock drops out. The stock which is included would have seen a price run up and vice versa for the stock dropping off.

So here is the danger for folks to have a regular monthly investment program in an index like the S&P500 Spider ETF. In a rising market, you are constantly buying a more expensive index. To combat this flaw, some indexes are now not based on market cap but instead on some other fundamental factors like dividend yield or based on revenue or some combination of factors that are not just related to market cap. The RAFI index and ETF is one example of such an index. Though historical data points to outperformance of the RAFI index versus the S&P500, it will be interesting to see how it does going forward.

Market Capitalization and Debt Indexes – If you are not so hung up over the flaws of the S&P, I think there is more concern about debt index – and in particular the debt government index.

While there is nothing wrong with a company achieving large cap status (in fact, that should be the goal). But the goal of any company should be to have less debt and not more. When General Motors and Ford and their respective finance companies fell into junk status, they became the largest debt issuers in the high yield index by a long mile. In fact, high yield managers’ outperformance or underperformance versus the index really depends their views and weightings in their portfolio relative to Ford Motor Credit or GMAC!

But right now, we could have an even more severe problem. Because the developed nations government debt is spiraling out of control, there is a real issue and danger in the sovereign bond index. After all, beyond a certain point, having too much debt will eventually become a fiscal and solvency issue. So if the United States have a very large weightings in the sovereign index because of its sheer size, does it mean we as investors should also have the weightings in our bond portfolio. Well, I would say that when debt is a manageable issue, that would not have been a problem. But now, it could be a potential issue. Perhaps weighting your bond portfolio based on criteria like debt to GDP ratio and other factors will be more sensible.

Ending Thoughts – I started off this post with a look at the flaws of a traditional market cap based index. This issue becomes an issue to investors of a stock market index during a bull market. But I fear that government bond indexes is increasingly becoming an important issue going forward. If you have a substantial portion of your savings in G7 government bonds, I would seriously do more investigation and research into it!

I think doing more thorough research and using individual country of market cap specific or industry type ETFs would not be such a bad idea going forward.

As I looked through my older posts, I stumbled across the India ETF list page, which had a list of ETFs that can get US investors exposure to the Indian market.

I first compiled this list in June last year, and since then there have been a couple of interesting additions to this space. There was no ETF that was tracking the Nifty, which is a major Indian index, and this void has been filled by iShares who have introduced an ETF that tracks the Nifty 50, and has an expense ratio of 0.89%. This is a good thing because it gives investors an option to invest in a widely known index.

There wasn’t any leveraged ETF that focused on India, but that is no longer the case, as Direxion has introduced a couple of 2x leveraged ETFs – long and short that are focused on India.

Check out the complete India ETF list here.

Update: I have done a more recent comparison on gold ETFs and that data can be found here. The methodology is the same which you can read there as well, but reading this post gives a good perspective on how this space has evolved.  Updated Article. 

This question keeps popping up in emails and comments from time to time, and I thought I’d address this with a post. Let me begin this post by saying that this is just my way of deciding which is the best gold ETF in India, and you are free to poke holes in this methodology, or even reject it outright, but if I were to invest in a gold ETF – this is the way I would go about it.

First off – I’d compare the expense ratios of all existing Indian gold ETFs, and see which are the ones with the lower expenses. I have already done that research earlier on this blog, and know that right now the Gold BeeS ETF from Benchmark Funds has the lowest expense ratio of 1%. Quantum Funds comes second with 1.25%. All the other funds charge higher expenses. The lower the expenses – the better it is because it leaves more on the table for investors.

Expenses alone are not enough for me because I want my investment to be liquid, and need the fund to have good volumes too. I went to the NSE website and gathered the volume data for all gold ETFs for the last month or so. I am presenting you yesterday’s volume data of all gold ETFs here. I am presenting just one day’s worth of data because that is pretty much representative of the overall volumes and is easier to read.

As you can see from the image – Gold BeeS, which has the lowest expenses also has the highest volume, and by a large margin too.

That does it for me – and if I had to invest in a Gold ETF – it would be this.

Keep in mind though that this is just my opinion and not expert advice tailored to your investing situation. Also bear in mind that I am not going to invest in this ETF because I am not looking at investing in gold right now, and even if I was – I would probably go for the more direct option of buying gold coins.

Update: I have done a more recent comparison on gold ETFs and that data can be found here. 

Yesterday I wrote about buying gold coins, and received an email from a reader asking whether there is any way of investing in silver without buying physical silver – like a silver ETF or a silver mutual fund.

I know there are plenty of silver ETFs in the US, and I have even created a list of silver ETFs in the past, but I was not aware of any silver ETFs available to Indian investors.

I dug up a little and found that although Benchmark funds had filed a prospectus for a silver ETF in 2008 – that fund never actually came to existence. A quick glance of the prospectus shows that even this ETF didn’t actually plan to buy physical silver, but invest in other overseas ETFs or mutual funds that were invested in silver. So, in that sense – it would not have been a very direct way of investing in silver.

I couldn’t find any mutual fund that invests in silver either, and I believe that there is no silver ETF or silver mutual fund in India at this time.

If you are interested in silver, then right now the best bet for you is buying physical silver, although storage of physical silver might become an issue as your holdings grow.

The next best option is probably engaging in commodity trading and trade silver, but this is not something I have done personally, and I have no knowledge of it.

If any of you know a good way to take a position in silver – please do share with the rest of the community here.

Image by Tim Ellis

I wrote about the Quantum gold savings fund yesterday, which is a fund of funds, and said that I couldn’t think of a situation in which I would want to invest in this fund. That was because it is a fund of funds that simply invests in another ETF that I can directly buy myself.

In that post I asked if you could think of any reasons of getting into such a fund, and I got an interesting comment about investing in this fund as an indirect way to set up a Systematic Investment Plan (SIP)  on an ETF (clever thinking).

This is something that I think a lot of people will be interested in because I can see a lot of interest in setting up SIP on ETFs from Indian investors.

I have covered this topic earlier and I thought I will do a quick post on this again, because since the last post I have got two comments that explore new ways of doing this.

And also because I know that a lot of you are interested in setting up SIPs on ETFs, but there is no direct way of doing this. There are a few indirect ways (which were covered here earlier) though.

Here are five such indirect methods:

1. Kotak’s Auto Invest: Kotak has a plan called “AutoInvest” that in an online trading account based on systematic investment planning  in Gold ETFs, equities and mutual funds.

2. Set up reminders with your offline broker: If you trade using an offline broker – you can tell them to remind you by giving you a call at a certain day of the month, and remind you to place the trade.

3. Set up reminders in Outlook or Gmail: You can set up reminders using Outlook, Gmail or any other tool that reminds you to invest at a certain day of the month.

4. Buy a fund of funds that owns ETFs: As stated in the comment in yesterday’s post – you can set up an SIP for a fund of funds that invests in a particular ETF you are interested in – and that gives you an indirect way of getting into a SIP for an ETF.

5. Value Averaging Investment Plan (VIP) from Benchmark funds: This is an idea given by another commenter on the earlier post. This product from Benchmark is akin to set up an ETF – I am not sure how effective this is because I haven’t used it myself or done any great deal of research on it, but it does give another option to investors.

All these methods have pros and cons and you should evaluate them in earnest before getting into any of them. For example, if you are thinking of setting up a SIP for a fund of funds – you need to keep the following factors in mind.

1. Expenses of this fund of funds: Most fund of funds charge you dual fees because they charge you their own fee, and then you end up paying the fee of the funds they hold, so in effect you end up paying twice.

2. Transaction cost of the fund of funds: When you think about setting up a SIP through a fund of funds – what is apparent is that you won’t end up paying monthly commissions to buy the ETF yourself, and that is certainly a saving. However, beneath the surface – your fund of funds must also incur transaction costs while buying the underlying ETF. Think about this factor when comparing the cost between the two.

3. Allocation: If you buy ETFs worth Rs. 50,000 every month, then you know that your 50 grand has gone into the ETF. But fund of funds may not always invest 100% of the money in the underlying fund. They may keep a part of it as liquid holdings in order to cater to redemption and such.

These are some factors that you need to keep in mind while evaluating a fund of funds for setting up a SIP instead of just buying the ETFs directly. Figuring this out on your own will be overwhelming for most, so you can take a shortcut and compare the returns on the fund of funds and ETF after a period of say six months or a year, and see how well both correlate. If there is a lot of difference between the two returns then that means that this fund of funds is not as good a proxy as you initially thought it to be.

So, there you have it – some indirect ways of setting up a SIP for an ETF, and some things to think about before you do it. Let me know what you think about these and any other ideas you have.

Photo by Sergei Golyshev